Fiscal Cliff Compromise Elusive as Congress Returns

As Congress returns this week to confront a so-called “fiscal cliff” at year’s end, many Republicans who have long dismissed any tax increase as unacceptable say they are willing to entertain higher revenue as part of a deficit-reduction deal -- so long as Democrats accept cuts in entitlement programs. Photographer: Andrew Harrer/Bloomberg

Nov. 27 (Bloomberg) -- Republicans’ post-election
rhetorical openness to higher taxes comes with a price that
neither side of the fiscal debate in Washington may be willing
to pay.

To get a deal with Democrats, Republicans would have to
turn their talk of higher revenue into a vote that may split the
party. And to transform Republicans’ talk into action, Democrats
would need to accept deeper cuts to entitlement programs such as
Medicare and Medicaid than they are willing to countenance.

“There’s still a great deal of ground that has to be
covered before they get anywhere near a budget deal, and time is
running” short, said Phil English, a former Republican
congressman from Pennsylvania and now a lobbyist at Arent Fox
LLP in Washington.

The depth of potential Republican support for tax increases
and the conditions attached to it will be tested over the next
few weeks as lawmakers negotiate with President Barack Obama.
The goal is an agreement to avert $607 billion in automatic tax
increases and spending cuts scheduled to begin in January.

Obama is scheduled to meet with small-business owners at
the White House today and plans to travel to a toy factory in
Pennsylvania on Nov. 30 to build public support for his approach
to averting the so-called fiscal cliff at year’s end, according
to an administration official who spoke on condition of
anonymity.

Higher Revenue

As Congress returns to Washington this week to confront the
fiscal dilemma, many Republicans who long dismissed any tax
increase as unacceptable say now they are willing to consider
higher revenue -- so long as Democrats accept cuts in
entitlement programs as part of a deficit-reduction deal.

In the Senate, Saxby Chambliss of Georgia and Bob Corker of
Tennessee have expressed willingness to renounce their past
anti-tax pledges. While the verbal openness to taxes questions
the hold of anti-tax advocate Grover Norquist on lawmakers who
signed his pledge against tax increases, Norquist calls the
requisite deal for spending cuts “a pink unicorn.”

So far, talks between Obama and congressional Republicans
haven’t yielded any significant progress. Even with the changes
in rhetoric and the willingness to work together, neither side
has offered a plan that moves off their pre-election position.

The president spoke by telephone over the weekend with
House Speaker John Boehner, an Ohio Republican, and Senate
Majority Leader Harry Reid, a Nevada Democrat, White House press
secretary Jay Carney said yesterday.

‘Remain Confident’

“We remain confident that we can achieve an agreement,”
and more “work has to be done” to come up with a plan that
both sides can live with, Carney said.

The efforts have made such little headway that Obama is
delaying inviting leaders to the White House this week as he had
originally planned, according to a Democratic congressional aide
who wasn’t authorized to discuss the talks publicly.

The negotiations are occurring amid advertising and
lobbying campaigns by advocates for keeping retirement savings
tax breaks, current dividend tax rates and social safety-net
programs.

Blankfein Meeting

House Republican leaders will meet tomorrow with business
executives including Lloyd Blankfein, chief executive officer of
Goldman Sachs Group Inc., according to a House aide who asked
for anonymity because the meeting hasn’t been announced. Thomas
Donohue, president of the U.S. Chamber of Commerce, met with
White House aides yesterday, said Sally-Shannon Birkel, a
spokeswoman for the chamber.

As their price for considering a tax increase, Republicans
are demanding structural changes to entitlement programs and an
overhaul of the tax code. They say they are waiting for Obama
and congressional Democrats to make an offer on spending cuts.

Senator Lamar Alexander, a Tennessee Republican, said Obama
needs to make the next move and propose restraints on
entitlements.

Balance Package

Business groups could support a “balanced package” that
doesn’t raise marginal tax rates and makes significant changes
in entitlement spending, said Jade West, senior vice president
for government relations at the National Association of
Wholesalers and Distributors in Washington.

“The reality has set in and something has to be done,”
said West, adding that many businesses pay taxes through their
owners’ individual tax returns. “Clearly, the rhetoric reflects
that status-quo election reality. I’m just waiting for something
to come from the other side.”

Significant questions remain about what Republicans would
accept. Boehner has drawn a line at increases in marginal tax
rates, suggesting that he could support limits on deductions or
other ways of increasing taxes on high earners that wouldn’t
raise their rates.

At the same time, Boehner has said he wants to take in any
additional revenue through economic growth and an overhaul of
the tax code. His statements haven’t specified whether he is
suggesting a tax increase as measured by congressional
scorekeepers, who don’t allow revenue generated by economic
growth from a tax overhaul to count in their estimates.

Tax Overhaul

The tax overhaul Republicans are contemplating for 2013
could put long-lived features of the tax code such as the
mortgage-interest deduction on the table for limits or
elimination. Repealing the deduction would raise taxes on 20.2
percent of households, the nonpartisan Tax Policy Center
estimated in 2011.

Democrats also will be faced with internal dissent over how
much they are willing to give on entitlement spending.

“There’s a huge, huge opposition both within the
Democratic Party and the administration and also the American
people against doing radical changes to entitlements that would
effectively cut a lot of benefits for middle-income families,”
said Ethan Pollack, a senior policy analyst at the Economic
Policy Institute in Washington, which favors policies that
benefit low-income workers.

Durbin Speech

Senator Richard Durbin of Illinois, the chamber’s second-ranking Democrat, is giving a speech today on the party’s
priorities for a deficit-reduction deal in which he will say
that major changes to entitlement programs have no place in the
near-term discussions about avoiding the fiscal cliff, according
to excerpts distributed by his office.

For years, the clearest statement of the Republican
position on tax increases has been a pledge written by Norquist,
president of Americans for Tax Reform. Signers promise to oppose
tax rate increases and any limits on tax breaks that aren’t
accompanied by equally sized tax rate cuts.

Their numbers have declined, while still a majority in the
Republican-run House. In the 113th Congress that will convene in
January, 219 of the 435 House members have signed Norquist’s
pledge, according to Americans for Tax Reform. In the new
Senate, 39 of the 100 senators are signers.

The 112th Congress, which will finish its business by
year’s end and confront the fiscal cliff, includes 238 House
signers of the pledge and 41 in the Senate. Some pledge-signers,
including Chambliss, Corker, Senator Lindsey Graham of South
Carolina and Representative Peter King of New York, all
Republicans, say they aren’t bound by it any more.

Honoring Oath

“The only thing I’m honoring is the oath that I take when
I serve when I’m sworn in this January,” Corker said on CBS
News’s “This Morning” program yesterday.

Pledge or not, Republicans generally oppose tax increases
and claim a mandate for their stance from their holding onto a
majority in the House, even though Democratic House candidates
won 1 million more votes than Republicans nationwide. Many House
Republicans don’t share some senators’ openness to higher taxes.

“There’s a rhetorical shift in recognition of the fact
that the election did send a message,” English said. “The
actual scale of the policy shift is much smaller than some are
reading into it.”

Over the past few years, some Republicans have made or
endorsed deficit-reduction proposals that would raise taxes.

Simpson-Bowles

Three Senate Republicans, including Mike Crapo of Idaho and
Tom Coburn of Oklahoma, supported a 2010 proposal from Obama’s
fiscal commission. That panel, led by Democrat Erskine Bowles
and Republican Alan Simpson, endorsed letting tax cuts on top
earners expire and raising about $1 trillion on top of that.

In 2011, Boehner and Obama discussed an $800 billion
revenue increase. That same year, Senator Pat Toomey of
Pennsylvania made an offer during the deficit-reduction
supercommittee that would have included higher revenue.

“Republicans in the Senate have moved toward a net
increase through tax reform some time ago,” said former
Representative Vin Weber of Minnesota, who advised presidential
nominee and Norquist pledge-signer Mitt Romney. “It’s a big
change.”

Still, none of the proposals with Republican support have
been turned into legislative language and brought up for a vote.

“There would be a great deal of tension” among Republican
lawmakers if presented with a proposal that would include many
of the changes, English said.